Bad Facts Make Bad Law

Along with the admonition about taking on too much student loan debt to finance a legal education that goes something like: "if you live like a lawyer when you're a law student, you'll live like a law student when you're a lawyer," the title of this blog is another truism that most new students learn almost immediately upon beginning law school. Bad facts do, indeed, make bad law.

Take, for example, the recent decision by the 8th Circuit Court of Appeals in Educational Credit Management Corp. v. Jesperson (http://www.minnlawyer.com/userfiles/pdf/073888P.pdf). There, the 8th Circuit was asked to decide whether the debtor, Mr. Jesperson, qualified for an "undue hardship" that would allow for his student loan debt to be discharged in a Chapter 7 bankruptcy proceeding.

The underlying Bankruptcy Court decision and subsequent appeal to the District Court for the District of Minnesota resulted in Mr. Jesperson's more than $350,000 student loan debt being discharged under the undue hardship provision after a finding that it was unlikely that his “shockingly immense” student loan debts would ever be totally repaid and, therefore, “without the relief of discharge now, the debtor would, in effect, be sentenced to 25 years in a debtors’ prison without walls.” Given my target demographic, I'm certain that many of you can relate.

Not surprisingly, the lenders appealed to the 8th Circuit which reversed the lower courts' decisions, holding that under the 8th Circuit's "totality of the circumstances" test, Mr. Jesperson did not meet the requirements to qualify for "undue hardship."

At the risk of getting too caught up in the legalese, suffice it to say that the 8th Circuit's "totality of the circumstances" test for whether a debtor qualifies under the "undue hardship" provision is a different test than that used by nearly all other Circuit Courts that have considered this issue. The other test, called the "Brunner Test," considers whether: (i) based on current income and expenses, the debtor can maintain a minimal standard of living if required to repay student loan debts, (ii) this state of
affairs will persist for a significant portion of the repayment period, and (iii) whether good faith repayment efforts have been made. These differing standards present a classic "circuit split" which will eventually need to be settled by the Supreme Court if Congress doesn't step in first to change the Bankruptcy code.

On its face, the 8th Circuit's test is arguably less stringent than that used by other circuits yet, nevertheless, applying it to specific facts of this case, the Court found that Mr. Jesperson did not meet the requirements for undue hardship.

Why? Because Mr. Jesperson was a terrible poster child for discharging student loan debt in bankruptcy under any measure.

As noted by the Court, Mr. Jesperson was relatively young, in good health, unmarried and, armed with a law degree, had good earnings potential. He began college in 1983, attended 3 different schools over the next 11 years, then decided to go to law school 2 years after finally earning his undergraduate degree - changed schools midway through law school and finally graduated in 2000, passing the bar on the first time in 2002. (I haven't a clue as to why it took him 2 years to take the bar after graduating).

Thus, after 19 years of intermittent education completely funded by enormous amounts of student loan debt, Mr. Jesperson was finally able to enter the workforce as an attorney. Between 2002 and 2007, when he initiated the Bankruptcy proceedings, Mr. Jesperson never made a single payment on his loans, took low-paying positions that he repeatedly quit for no apparent reason and made no effort whatsoever to make good on his promise to pay back what he borrowed.

Nobody is more sympathetic than I am when it comes to the crushing burden that exorbitant student loan debt can present, however, even I find Mr. Jesperson's choices to be appalling. One gets the impression that he never intended to pay back the incredible amounts of money he borrowed and that, if he could, he'd have kept taking out student loans for the rest of his life. Rather than being a poster child for "undue hardship," Mr. Jesperson made himself the poster child for good, old-fashioned irresponsibility.

So, why does any of this matter? Because the 8th Circuit's decision rests on the assumption that the availability of programs such as the Income Contingent Repayment Plan (ICRP) and, presumably, the newly implemented Income Based Repayment program (IBR), repaying his student loan debt would not present an undue hardship and, therefore, his debts cannot be discharged under Chapter 7.

Perhaps if a more responsible debtor had made a similar claim to have his or her student loan debt discharged as an undue hardship in a Chapter 7 proceeding, the Court would have reached a different outcome. Unfortunately, given Mr. Jesperson's irresponsibility, there is now established precedent that the availability of income sensitive repayment programs such as ICRP and IBR renders repayment less of an "undue hardship" and, thus, meeting that standard just got that much harder.

Courts establish precedents by applying the law to the facts of the cases before them. When the facts of a given case are "bad," the decisions the Courts render are, more often than not, equally bad.

One can debate whether the 8th Circuit's "totality of the circumstances" test or the more common Brunner test is the better approach, the lesson here is that Congress, and not the Courts, needs to fix the Bankruptcy code with respect to student loan debt.

Unless and until Congress fixes what's wrong with the Bankruptcy code with respect to student loans, at least in the 8th Circuit, the availability of programs such as ICRP and IBR only make it that much harder to meet the "undue hardship" requirement for discharge in bankruptcy. Whichever test a Court chooses to apply, there is now an additional hurdle to meeting the undue hardship standard for the discharging of student loan debt in bankruptcy.

I suspect that Congress initially decided to make student loan debt generally non-dischargable in Bankruptcy precisely because of the actions of a select few like Mr. Jesperson. A blanket prohibition on bankruptcy for student loans, however, is not the answer and only Congress can fix that.